Escaping the Historical Parallels of European Economic Chaos

The Treaty of Versailles, signed at the conclusion of World War I in 1919, required that Germany make economic reparation payments of 132 billion German marks to other European nations -- $400 billion, in today's prices. Germany's resentment over having to make these payments -- most of which were never ultimately made -- played a substantial role in fomenting the rise of the Third Reich and World War II.

Is no one else haunted by the thought that European economic history may be reflecting itself in the mirror? The people of countries indebted to German banks and EU lending nations are in the streets. Admittedly, the indebtedness stems from commercial and national borrowing, but the reaction to austerity and foreign debt seems eerily similar. Governments or ruling parties have fallen in France, Italy, Spain, Greece, the Netherlands, and several other countries. Unemployment has reached depression levels in Greece and Spain.

Is the only solution to the financial crisis to continue austerity in the hopes that more serious civil conflicts do not start a cycle of chaos and further economic weakening? Isn't the risk of contagious civil strife, political extremism, and economic retrenchment together more costly than a reconfiguration of currency unions and balance sheets? It is hard to believe that either national or commercial bankers see the current direction as value-preserving, much less value-creating. As Marcus Miller and Robert Skidelsky recently noted:

"One of the lessons of history is that sovereign debts must be managed in ways that do not destroy either the economy or the political center ground. Europe hosts some of the best -- and best paid -- financial experts in the world; let their talents help governments shake off their paper shackles and devise ways of reducing debt without austerity."

Last weekend's G8 summit provided a sliver of hope when President Obama emerged from it with a message that "more must be done to promote growth and job creation now." However, no bold new initiatives were announced, and it is hardly reassuring that Germany reportedly opposed putting any language regarding the crisis into the summit's Communique, ostensibly because the G8 included non-European nations.

And what of the U.S. role in the European debt crisis? In the aftermath of World War I, the United States supported the Treaty of Versailles and thereby helped set the stage for another world war soon to follow. Following World War II, U.S. diplomatic and economic leadership was perhaps the single most important force creating the European Union and a half-century of unprecedented growth and peace. The Marshall Plan was a staggeringly bold undertaking, an agreement among 16 European countries and the U.S. forged in an eight-week marathon negotiating session designed to re-establish all of Europe's economies within four years.

Sadly, this is one historical parallel we are unlikely to see. There is no specter of communism stalking Europe sufficient to create a bipartisan U.S. commitment to comparable leadership or aid -- only the dangers of economic disorder. There is no sense of crisis like the one Washington felt in 1947 as postwar Europe faced famines, life-threatening coal shortages, and ongoing political crises. While the president calls for European growth, Congress is focused overwhelmingly on our own economic malaise and debt levels, with yet another mud-wrestling match over debt ceilings coming at year-end. Rather than countering each European country's self-absorption which on net has led to strangling austerity, we are letting pursuit of our own narrow reinforce it.

Surely there is no doubt, on the rational left or right, that economic integration and trade on fair terms contribute mightily to peace and prosperity. Moreover, no one claims that a resolution of current EU debt burdens and financial system instability will be easy to design. "But," as Keynes wrote with great prescience following the Treaty of Versailles, "who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?"